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More than the Average BoE Rate Hold

The Bank of England is due to weigh on monetary policy Thursday in London, and the market is remarkably confident on its outcome. Looking to overnight swaps, there is seemingly little chance that the UK central bank will move again on its benchmark rate. That would make sense given the run of data that the country has faced over the past weeks. We have seen sentiment surveys in retreat for some time, inflation expectations have deflated and the first quarter GDP update posted the weakest growth reading in five years. Add to those economic restrictions the loss of traction in the UK's solid front at the Brexit negotiation table. Parliament has voted against the government's policies aimed at putting pressure on the EU nearly a dozen times now. Collectively, there is little incentive for and thereby probability of the BoE moving for an immediate hike.

The Quarterly Inflation Report Offers Nuance and Market Potential

Even if the BoE holds rates as expected at this meeting, there is still potential for the event to result in a meaningful Sterling reaction. The market potential is in the details for this unique meeting. This forethcoming meeting is one of the quarterly events whereby the standard policy call is accompanied by a press conference by Governor Carney and the all-important Quarterly Inflation report. Carney's views are important, but given this is still a democratic-style central bank; the comprehensive report carries the greater possible impact. Looking back over the previous update, the BoE was notably optimistic. Their assessment of wage growth was buoyant, the slide for the Sterling was noted as a lever for inflation and they even offered enthusiasm over the outlook for global trade. All these fronts have deteriorated to some degree. If the BoE accounts for all of these developments, it is very likely that they weigh forecasts for rate hikes later this year. According to swaps, there is still a hefty probability for the BoE to hike this year, but that means there is more ground for the Pound to lose if it disappoints.

Context from the Sterling, Context from Global Counterparts

If we want to accurately gauge how the market will respond to this important event, it is important to consider the perspective Pound will have going into it. The Bank of England is considered one of the few legitimately hawkish leaning major central banks - meaning they have actually raise rates in this cycle. That is a rarified group that have actually taken steps to tighten the reins. While they may not have hiked anywhere as fast or consistently as the Fed, the hike it has registers sets it apart from many including liquid benchmarks (Euro and Yen) as well as carry currencies (Australian and New Zealand Dollars). This unique position has helped raise the Pound since the beginning of 2017 and with considerable gusto over just the past 9 months. This can in turn leave GBP in a position where it is overbought and worryingly exposed to disappointment. Then again, the slide we have registered over the past weeks alone can change that dynamic and - along with the sharp discount in rate forecasts - can set the currency up for a recovery opportunity should the group remain defiant in its optimism on growth, inflation, financial health and the Brexit.

Pairs to Consider, Pairs to Avoid

Even when I have a strong conviction that a market will move in a particular direction backed by fundamentally-leveraged motivation, I will often evaluate contingency plans. It is just good practice to have strategies for different outcomes to account for the dynamism of the financial system. In the event that the BoE refuses to give up its enthusiasm and plans for near-term rate hikes, there are few better options than GBP/JPY. The pair held a meaningful channel support this past session. If risk trends hold steady or rise, that will only raise this pair's appeal. Should they fold to Brexit and local economic strain, the Sterling cross I am most interested in is GBP/AUD. In terms of currencies that are seen as trading at a discount, the Aussie Dollar is near the top of the charts. For a bullish event, my preference for rally would be GBP/JPY. Alternatively, if the BoE takes its troubles to heart and discounts all rate expectation hopes, I still like GBP/AUD. One pair to be cautious around is GBP/USD. The Greenback has proved itself to a unique counterpart with four weeks of steady - not bombastic - advance. A strong Pound outcome from the BoE would pit the GBP strength against the Greenback. Meanwhile, trade wars, the US withdrawal from the nuclear deals, and much more complicated this pair to the point where merely trading would be risky. We discuss the BoE rate decision and its impact on the market in today's Quick Take Video.

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